Canada

Dodging Canadian Foreign Buyer Taxes: A Guide To Exploiting Loopholes For Fun and Profit

Dodging Canadian Foreign Buyer Taxes - A Guide To Exploiting Loopholes For Fun and Profit

Most people aren’t aware of Canada’s shadow real estate market. These are off market sales, that don’t notify the government in any capacity. I thought it was a small market. That is, until a provincial party leader explained their concern regarding the potential impact on tax revenue to me. Turns out, some provinces suspect an increasing number of people are turning to these types of transactions in speculative markets. This got me thinking, if they aren’t paying land transfer taxes, can this be used to dodge a foreign buyer tax as well? It sure can, and here’s how you would do it.

The Least You Need To Know

There’s not a lot you need to do this, but you will need to know what a shell corporation is. Shell corporations are legal entities that can sign contracts, and act like real people – but it’s unclear who the beneficial owner might be. A beneficial owner, for those that don’t know, is pretty much what it sounds like. This is the person that ultimately benefits from the actions of the shell company. You’re probably wondering why the fudge do these exist? Afterall, Transparency International makes it seem like they’re only for money launderers.

There’s legitimate uses for a shell corporation in the corporate world. Sometimes a big company wants to hide that it’s doing research at an unknown subsidiary. Without alerting it’s competitors, they can setup a shell corp, and make it seem like they’re running a tiny startup. A corporate raider might want to buy 10% of a company to steal a board seat, but doesn’t want people to know they’re doing it. Instead of having to pay a big buyer (a.k.a whale) premium, they could set up 100 companies that slowly acquire 0.1% each. Then do a whole lot of merging. Point is, powerful people use these, so they’re not going anywhere.

How A Non-Resident Speculator Tax Works

Knowing how the non-resident speculator tax (a.k.a. a foreign buyer tax) works is also helpful in understanding this gap. When a non-resident buys property either by themselves, or through a foreign company, they get hit with a tax in Toronto and Vancouver. This tax goes into effect on the transfer of property, and is tagged onto the land transfer. Any time a there’s a land title change, you need to notify the registry, and can be hit with an additional tax. The land-transfer is obviously the weakness here.

The Exploit Is So Simple, It Almost Looks Intentional

Real estate held in corporations, are property of the corporation. Executives of the company don’t technically own the property, the company does. When a corporation is bought or sold, there isn’t necessarily a change in title on the assets owned. This is particularly true with a shell company. Simply putting property in a company’s name, and selling the company instead of the land, might be enough to avoid a foreign buyer’s tax. That was way too easy, so I had to check in with the provinces.

BC Ministry of Finance Response

First stop, the BC Ministry of Finance (BC MoF), which oversees land transfers. A BC MoF employee explained they are only notified when there is a change of title. If a company is sold holding property, it wouldn’t necessarily show up on their radar. That is, unless there was a change to the title itself. They weren’t 100% sure this was considered avoidance either. As far as they know, it’s never happened. They also said “hypothetical situations” like this are also difficult to come up with an answer. If you want a definitive answer, you should get an advanced tax ruling. It sounds like the risk for getting caught here is slim to nil.

Funny enough, I came across a quote from a BC politician mentioning this to a small local news outlet, Richmond News. B.C. Green Party leader, Andrew Weaver, was discussing speculation of Agricultural Land Reserves (ALR). In passing he mentions that bare trusts and numbered companies can be used to mask beneficial ownership. This in turn can be used to avoid property transfer taxes, which is where you would normally be hit with the foreign buyer tax. So apparently the government is aware there’s an issue.

Note: Before you ask, no. Weaver was not the person that brought up transfer issues with me.

Ontario Ministry of Finance Response

Checking in with the Ontario government didn’t yield different results. Ontario is a little better with back and forth, so they sent it to a policy analyst before getting back to me. Turns out it’s pretty much the same thing, they would only be notified if there’s a change of title. If the company changes hands, and there’s no need to change the title, they would not be notified. They also brought up that “hypothetical scenarios” are hard to give definitive answers. Basically, they would have no idea whether this is happening or not, because you know… they wouldn’t be notified.

How Many People Are Doing This?

Due to the way these transfers are done, there’s no real way to tell how many people are doing this. In Vancouver, Transparency International determined there is significant use of shell companies for holding luxury properties. In their sample data, they found that 25% of luxury property records analyzed were held in Canadian shell companies. Oh yeah, another 4% were held in offshore shell companies. Now this doesn’t mean any of the properties they found participated in this sort of trade. It would just be smart of their buyers to utilize this sort of structure to avoid transfer and foreign buyer taxes. Don’t act like you wouldn’t.

In Toronto, I suspect it isn’t happening nearly as much. Despite what people think, Toronto real estate isn’t nearly as sought after as Vancouver real estate. It just doesn’t have the same history of being used as an informal investment market in Asia. It does have a lot of locals with deep pockets, an unwavering belief that the city is the best city in the world, and 48,000 real estate agents however. Which means pretty easy picking for speculators. That said, the original land transfer tax avoidance conversation was in reference to Toronto, so it’s definitely happening there. It’s just not clear if these are domestic or international players.

Much like Bill Morneau, I’m a believer that free market solutions are the best way to deal with issues. However, I’m not a fan of exploiting loopholes that impact an essential need like housing. By democratizing data and information, the competitive edge can be eliminated. If everyone is using a “loophole,” it’s not a loophole – it’s the way things are. The way things are tend to change a little quicker than debates on whether or not a loophole is being exploited.

If you feel bad about using techniques like this, don’t – you’re Canadian. Exploiting legal tax loopholes are something our country’s leaders have been apparently doing for generations. Happy avoiding!

Disclaimer: This is provided as a starting point on your quest to ruin your neighbourhood, and is not bulletproof legal advice. You should consult a legal expert if you’re going to do such a crappy thing. I suspect that if the government isn’t quite sure if this is considered an avoidance measure, your lawyer will be able to argue the tax isn’t enforceable in this case. If this is too sketchy for you, you can always just start a mortgage investment corporation and sling investments overseas. That seems to be working out for a lot of people.

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12 Comments

  • Reply
    bb 1 week ago

    Learning about this is so depressing because government obviously knows what is going on and is unwilling to do anything about it. We need a big expose and some leadership. I don’t want to participate in these morally questionable activities even if it is a legal loophole. I don’t want to reward participants in the real estate business world by participating in the home purchasing/selling, paying a distorted price and uncompetitive service fees to enablers and speculators. Unfortunately, since our society fetishes homeownership, not participating in this charade marginalizes people like me.

  • Reply
    Im Therious 1 week ago

    When I lived there in the 90s, I remember the attitude of the locals that I thought would result in this housing mess.

    Basically, the mountain and water views were so breath-taking that nobody cared about the municipal and provincial politics. It was the time of the Fast Ferries fiasco, widening of the Lions’ Gate from three lanes to… three lanes…

    It’s no surprise to me that in the 2000s and 2010s, the people of the GVRD became even smaller pawns in a game of even larger international money than the 80s.

    But what about ‘dem mountains and water views, eh?

    • Reply
      David Z. 1 week ago

      Can anyone see the mountains these days, or are all of the houses with a view empty?

  • Reply
    Alexander Wijtowych 1 week ago

    Why does the government think it’s a good idea for corporations to own residential property? Corporations should only be allowed to hold commercial properties, not residential properties… Those domains shouldn’t overlap.

    The government needs to ban corporations from owning residential properties, or at the very least, justify the businesses intent for owning one.

    The government needs to help its citizens, and give first time home buyers priority over corporate entities.

    • Reply
      Bay Street Guy 1 week ago

      How would landlords own homes? Honest question, because they have to run homes like a business, and protect their own interests. You think it’s tough to find a rental now, that problem increases ten fold if landlords had personal liability beyond the property they run.

      • Reply
        Alexander Wijtowych 1 week ago

        Pretty sure I mentioned if they can justify their business intent.

        Secondly, if it causes landlords to avoid buying properties, it should weaken buying demand, and drop the number of sales, making for a softer market.

    • Reply
      Danuta 1 week ago

      seconded !!!

      • Reply
        Danuta 1 week ago

        Seconded for the landlord to owe the residential property and pay commercial taxes on it!! While the interest rate is at balance level 5% and more!!

  • Reply
    Danuta 1 week ago

    Toronto is a nice city, but please folks don’t compare with London, UK or NYC. Canada does not have world class city’s economy. Did you ever ask yourself how many people are flying in and out to London, Manhattan and Toronto? Look at their number of airports and traffic!! I know, real estate gurus are not microeconomics, but please have some common sense.

  • Reply
    Bay Street Guy 1 week ago

    My favorite part of this article is the BC government saying they wouldn’t be notified in the event of a transfer. Then following with they don’t believe it’s happened. I hope the irony wasn’t lost on them in that conversation.

  • Reply
    Hh 1 week ago

    Great read ! Thanks. Wouldn’t banks catch this when Doing mortgage financing or is it cash purchases?

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